Whispering bogey calls for a wary tread

The bad news at Australia’s biggest goldminer,
Newcrest Mining,
was the market’s worst-kept secret this week. The company’s board met early on Friday morning to sign off on a decision to close the company’s Brisbane office, push ahead with up to $6 billion in writedowns, cancel its final dividend and cut production guidance.

Newcrest informed the Australian Securities Exchange a short time after.

The problem for chief executive
Greg Robinson
and chairman
Don Mercer
was that everyone in the market already seemed to know what was coming.

Five analysts had downgraded their price targets on the stock during the week, which was reflected in a sharp fall in the company’s share price.

News of job cuts and office closures had already leaked to the market, although the write-downs appeared to surprise.

Overshadowing what was an important announcement affecting the company’s future is a murkier issue which goes to the heart of the sharemarket’s integrity.

Before the market opened, brokers were screaming blue murder over the way the company handled the announcement.

Bell Potter strategist Charlie Aitken copied Australian Securities and Investments Commission chairman Greg Medcraft in on an email sent around the market suggesting something was suspicious with the downgrade.

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Why did five broking analysts all downgrade the stock in the same week, citing similar reasons? Was it “divine intervention" or a strange coincidence? And why the downgrades during a week when the gold price was stabilising?

The issue has put the spotlight back onto the issue of corporate disclosure and who is being told what when.

Selective briefings, or a whisper in the ear to analysts to massage consensus forecasts, are not unheard of, particularly in the smaller end of the listed market. But it is a grey area and when a large prominent company such as Newcrest is the subject of allegations, it raises serious questions.

It needs to be made clear that Robinson has firmly denied the company selectively briefed analysts. It has not been an easy two years in the job for the CEO, with factors largely beyond his control wiping $20 billion off the company’s market value.

He was not happy on Friday that the disclosure issue was attracting more questions than the announcement itself.

He told Chanticleer that analysts were reacting to a decline in the price of gold, and a presentation he made in Barcelona last week about a shift in company’s strategy to focus on costs and reducing capital. There were suggestions some analysts might be playing catch-up after some brokerages downgraded the stock a week earlier. News about job cuts at the company did leak early, although that was hard to prevent, given the number of staff involved who needed to be informed of the decision before the statement went out.

As you would expect, the ASIC and the ASX are looking into the matter. The normal practice for the ASX would be to send Newcrest an “aware" letter that seeks to ensure the company was in compliance with its continuous disclosure obligations. The letter would seek to define a sequence of events to establish when the company became aware of the market-sensitive information. Any response would be released to the market.

While the legal framework exists to tackle the disclosure issues, corporate law experts say the ASIC struggles gathering evidence if information is exchanged verbally. The ASIC has shown it can get tough on disclosure, issuing infringement notices on
Leighton Holdings
,
Rio Tinto
and other big companiesin recent years. The fines can be small but the reputational damage is big.

Companies that selectively brief analysts are walking a dangerous tightrope. On one hand, they can be useful as a tool to provide informed and critical analysis. But if they cross a line, there is the potential for insider trading.

“It clearly raises important questions. The focus does shift onto the issue of what resources are you going to chuck at this for such a prominent company that raises these important issues about market integrity," Melbourne university professor Ian Ramsay says.

Whether or not the regulators uncover any wrongdoing, there is no doubt Newcrest has not handled this announcement well.

Disclosure issues aside, Robinson is making some tough decisions to get the company on the right track for the future.

Newcrest is worth a third of what it was when he inherited the chief executive job from
Ian Smith
in July 2011. A weak gold price, strong Australian dollar, and issues with acquisitions made at the top of the market have been largely responsible.

Like many of his peers at the top end of the mining sector, Robinson is cutting costs and winding back high-cost production. He is confident the balance sheet is strong although gearing is not where the company would like it to be.

There has been some finger-pointing at Smith, who now runs explosives maker,
Orica
for Newcrest’s Lihir acquisition. However, he was unrepentant when I asked him about it recently, saying there would “not have been much of a company left" if he hadn’t done the Lihir and Cadia East deals. Robinson shares Smith’s view that Lihir is one of the world’s top potential gold deposits.